Popular Senior Housing Investment Program Faces Uncertain Future

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A popular financing program is under fire as a Congressional deadline looms. Lawmakers could extend the EB-5 investment and visa program or enact changes that could make it more difficult for U.S. developers to fund projects, including in senior housing.

The EB-5 Regional Center Program allows foreign citizens to qualify for a U.S. residency visa if they make a significant development investment of at least $500,000 for a project that creates or preserves at least 10 jobs for U.S. workers. The program has become increasingly popular over the years in senior housing as well as for other types of projects, with many aimed at targeted employment areas (TEA), where unemployment rates are significantly higher than the national average.

“In the last six years, almost $12 billion of foreign investment has come into U.S. projects,” Debbie Klis, a partner with national law firm Ballard Spahr who deals with EB-5 financing, tells SHN. “That’s significant, and also shows its success. The $12 billion has gone into improving projects, with 98% or 95% in targeted employment areas (TEAs), in rural areas or areas that have had employment problems.”

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Despite its successes, Congressional members are considering regulatory changes to address concerns of fraud, lack of oversight across regional centers and unequal distribution to projects within designated TEAs.

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The EB-5 program was originally created in 1990 by Congress as a way to stimulate the economy, create jobs and increase capital investment from foreign investors. Most projects are mandated to be developed in designated TEAs or rural areas, but a larger investment of $1 million from foreign citizens can overcome this barrier.

Within senior housing, EB-5 financing is frequently used in conjunction with bridge loans, which allows projects to be pre-funded without delay, given a large pool of foreign investors hungry for U.S. senior housing development. Developers can repay debt with EB-5 financing while getting projects underway faster.

In September, Congressional lawmakers approved a short-term extension of EB-5 to keep the program from expiring and give themselves more time to develop proposed changes. Regulatory talks were prompted by findings of fraud throughout the program and uneven distribution of the type of real estate projects approved for commission.

The Washington Post recently reported that while the program was intended to target areas with employment and income rates below the national average, “the bulk of immigrant investment is going to projects that are located… in prosperous urban neighborhoods.”

Other concerns are related to a lack of oversight within states’ regional centers.

James “Jimmy” Taylor, head of development and operations at Omega Communities, works on alternative financing structures within senior housing and recently closed two of Omega’s EB-5 senior housing developments in Florida. Headquartered in Birmingham, Alabama, Omega Communities develops senior living communities in affinity relationships with sponsoring churches in the Southeast. He says that while the program has been largely successful, there have been some bad apples in the batch of developers utilizing this financing.

“Every story has good guys and bad guys,” Taylor tells Senior Housing News. “For the most part, EB-5 has been a tremendous program for development in the United States. It’s an overall good public policy and endeavor. But then you have situations, primarily with regional center operators, where, in isolated cases, things weren’t done by the book. As a result, it has cast some doubt and shadow.”

The Securities and Exchange Commission (SEC) recently froze the assets of EB5 Asset Manager LLC, alleging that Lin Zhong and her company raised at least $8.5 million for real estate development projects and diverted nearly $1 million for improper personal uses, including purchasing a boat and luxury vehicles.

In addition, other unrelated objections to immigration policies around the country have also prompted another look at the EB-5 program’s impact, says Taylor.

“With the national outcry over various other immigration issues, totally unrelated to EB-5, it just brought great scrutiny to the program,” he tells SHN. “It was kind of the perfect storm of attention to the EB-5 program.”

To Be Determined

At least three bills have been introduced to Congress that would reauthorize the EB-5 program, with changes that include permanent reform measures. While Congress weighs the modifications, developers are anxiously awaiting the decision due next month.

With plans to develop nine more senior housing projects over the next two years in Florida, Georgia and Texas, and two already closed with EB-5 financing in the region, Omega has had to position itself with alternative financing options as Congress makes up its mind about the program.

“I think you have to say that EB-5 financing is more risky with the uncertainty,” Taylor tells SHN. “…We’ve developed backup plans knowing that this was out there. We would never take the risk of assuming what is going to come out of Congress.”

One change under consideration would increase the minimum investment price from foreign nationals up from its current value of $500,000 to $800,000 for projects within TEA designations. The pending changes have sidelined some investment funds from senior housing projects, says Taylor.

Bumping this figure up could have both a positive outcome and a negative impact. For one, fewer investors would be needed to finance a development. However, increasing the price 60% would also reduce the pool of available and qualified investors.

Another of the regulatory changes has to do with the designation of a TEA itself. Currently, states have their own ability to determine a TEA within its geographic borders. Complaints over the use of TEA designations may lead to a federal mandate in legislative modifications. According to Klis, whatever Congress decides on this arm of the program would have the biggest impact.

“Of all the changes, the targeted employment area (TEA) is the one that will affect projects the most,” says Klis. “Most [changes] have to do with how business is done, but the TEA one will affect where and how projects will be done. It will really hinder the use of EB-5 unless it is in more rural areas.”

Congress could also mandate more accountability for regional centers.

“Other provisions are more oversight over regional centers, which is probably a good thing,” Klis told SHN. “There’s a really good application process, but once you’re formed, there’s just an annual filing and not much scrutiny. There could be more annual scrutiny and annual compliance.”

Fortunately, while the outcome of the pending changes is currently unknown, some maintain that the program will not have a significant impact on the overall health of senior housing development.

“It’s my opinion that there is so much investment coming into the senior housing market right now that the loss of EB-5 might have isolated impacts,” says Taylor. “If EB-5 were to not be available at all—perish the thought—it’s not going affect senior housing development in a material way.”

The short-term extension of the EB-5 program is set to expire December 11.

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